1HFY21 CNP of RM19.5m (-28% YoY) came in below expectations at 39% on weaker-than-expected export sales. Post-results, we downgrade the stock to MARKET PERFORM with lower TP of RM2.25. This is following earnings and valuations downgrade to reflect our more cautious stance towards the group’s near-term outlook, which may be impeded by uncertainties such as resurgence of Covid-19 cases and higher taxes in the Middle East.

Below expectations. 1HFY21 core net profit (CNP) of RM19.5m missed expectations at 39% of our and street’s respective full-year forecasts. The negative mismatch is likely due to worse-than-expected export contribution. Declared dividend of 2.0 sen (YTD: 4.5 sen) is deemed within.

Results’ highlights. YoY, 1HFY21 revenue dipped 16% to RM163.6m, dampened by: (i) weaker domestic sales (-16%) which was disrupted by lower retail footfall during MCO, as well as (ii) softer export sales (-16%), mainly from Saudi and UAE as demand remained soft on the back of various impacts from Covid-19 coupled with higher taxes (i.e. higher sugar tax and VAT tax). Notably, costs appeared to be well contained YoY as EBIT was flat, with margin expanding 0.2ppt. Nonetheless, CNP dropped 28% on higher ETR.

QoQ, revenue dropped by 5%, as the recovery in domestic market post- lockdown (+35%) was overshadowed by the weaker export contribution (-31%), likely plagued by the aforementioned reason. On top of higher ETR and thinner EBIT margin, which could be due to lower economies of scale, CNP fell 21% to RM8.6m.

Prevailing uncertainties. We are cautious over the group’s near-term outlook, as the resurgence of Covid-19 cases locally and the higher taxes in the Middle East are likely to exert further pressure on the group’s profitability. That being said, any weakness in profitability should be partially cushioned by: (i) relatively inelastic coffee demand, and (ii) controlled margins from the group’s continuous business transformation plan to achieve greater cost efficiency by driving rationalisation exercises for its distributorships, sales force and factory operations. We also gathered that the group has been strengthening their online presence by setting up flagship stores at high-traffic e-commerce sites, targeting to cater the changing consumer shopping patterns.

Post-results, we cut our FY21E and FY22E earnings by 13% and 10%, respectively, to account for weaker export contribution.

Downgrade to MARKET PERFORM with lower TP of RM2.25 (from RM2.75), based on an adjusted FY22E 18.0x PER (from 20.0x PER) which is closely in-line with its 3-year mean. While we still like the group for its solid balance sheet and decent dividend yield of c.5%, we are nonetheless concerned over near-term uncertainties, which may impede the group’s profitability.

Risks to our call include: (i) higher/lower-than-expected sales, and (ii) lower/higher-than-expected dividends.

Source: Kenanga Research - 27 Nov 2020